This Out-Performer Could Slow Down in 2013
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You bought a stock in January 2012, and forgot all about it. Six months later you dug it out to calculate your returns, and realized the stock gave you nothing! But what you missed is the sharp swing in share prices in between – a whopping 60% surge by February alone.
Fast-forward to December 2012, and you’d be sitting at neat profits of 58% year-to-date, if you still hold the stock, that is. That’s Manitowoc’s (NYSE: MTW) wild run in 2012. The question now is: Will it continue to rally through 2013 as well? Frankly, I'm not expecting much.
The ground’s moving
A key reason for the market’s optimism around Manitowoc is its turnaround to profits this year. Though we still await its financial 2012 last quarter numbers, the crane maker already posted profits of $67.2 million for the first nine months compared to losses of $26.1 million same period last year. It shouldn’t be tough for the company to end the year in the black.
The uptick in construction activity in the North American markets played Santa Claus for Manitowoc, helping it survive an otherwise challenging year. While peers gained too, the effect was stronger in Manitowoc’s case as 50% of its crane business sales come from the U.S. alone. So for a change, the fact that Manitowoc has limited exposure to global markets worked in its favor.
But is the outlook all rosy for next year? Not quite. Caterpillar (NYSE: CAT) slashed its full year outlook and has a muted one for 2013 as well – revenue to be 5% up or down from 2012 levels. Terex (NYSE: TEX) has much better numbers to show off -- 24% rise in top line and nearly triple the profits for the first nine months compared to same period last year. But there’s a catch – most of the growth can be attributed to its recent acquisition of Demag Cranes (a sample: Terex’s last-quarter sales rose 1% including Demag but dipped 8% excluding it). Likewise, Deere’s (NYSE: DE) guidance 8% growth in its construction segment sales for 2013 might sound fine, but only as long as you don’t compare it to 19% growth reported this year.
Here’s what management of each company had to say during their respective last earnings call.
Caterpillar: “We’re cautiously optimistic about construction sales in the U.S. going forward.”
Terex: “I think as we look into the fourth quarter and planning for 2013, I think we’re looking at a solid, maybe not spectacular but a solid market going for the next two to three to four quarters.” Terex feels any real growth will only come during the latter half of 2013.
Deere: “It’s fair to say that the ag markets in the U.S. are very strong, not as strong in markets outside, and construction is still in, I’ll say, a recovery mode, although they’re getting closer to a more typical cycle.”
Undertones of low confidence, right? Moreover, Caterpillar has its mining business to fall back on, which despite slowdown fears is turning out to be the dark horse. Deere is 80% about tractors and only 20% about excavators. Terex will look to capitalizing on its Demag acquisition while tuning it right by cutting costs to boost margins and strengthen its balance sheet.
Sadly, Manitowoc has no such story to share. Its long-term debt load is humongous at around $2 billion. Cash equivalents of $71 million, interest coverage of 1.8 times and free cash flow of just around $44 million don’t provide much comfort either. Worse, Manitowoc’s other business, foodservice-equipment, is struggling to push top and bottom lines up.
For the nine months that ended September, revenues from Maitowoc’s foodservice business remained strikingly flat at around $1.15 billion compared to same period last year. Naturally, when customers couldn’t grow, how could Manitowoc? McDonald’s (NYSE: MCD) tops the list of examples. Its last quarter numbers were distasteful, and what followed was enough to send its stock plummeting to a 52-week low – McDonald’s October same-store sales declined 1.8% for the first time in 9 years. Year-to-date, comparable sales rose only 3.4% compared to 5.2% a year ago. While Europe was the king of problems, food inflation kept customers at bay.
McDonald’s has planned a new menu for 2013 (have you tried the McRib yet?), but management’s words still ring loud in my ears – “The next few quarters will continue to be challenging from both the top and bottom line perspective." Fast-food companies have several challenges to tackle, which automatically signals caution for Manitowoc. Given that the business accounts for nearly 40% of Manitowoc’s total sales, the company won’t have much to cheer about unless this business scales up.
It’s a tough call
Then there’s also the Europe factor to deal with, a market that is responsible for 20% of Manitowoc’s sales. I personally wouldn’t expect Manitowoc’s stock to leapfrog in 2013. Having gained so much this year, it is also the most expensive stock today at a P/E of 25 times. Terex trades at 22 times earnings, while Caterpillar and Deere are cheap at 9 times and 11 times earnings, respectively.
It will all depend on how well Manitowoc balances and ramps up its two diverse businesses, pays off debt and boosts margins. Manitowoc has plenty of potential, but Caterpillar is still the industry leader. Find out whether Caterpillar is a better buy than Manitowoc inside our new premium research report on Caterpillar, which goes through all of its long-term challenges and the ways it intends to meet them. Just click here to access it now.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!